In My Previous Article titled Clubbing of Income and related provisions- Part I I have discussed the meaning of Clubbing, When it is applicable, and some of the provisions related to Clubbing. In this article I have further covered the remaining provisions :-
Analysis of ‘Revocable’ transfer of asset
As per the provisions of Section 61, Income arising from the irrevocable transfer of assets shall not be clubbed in the hands of transferor , where irrevocable transfer of assets are the assets transferred to any person not revocable during the life time of the transferee.
Literal meaning of above states that , if asset is revocable after the life time of the transferee , in such case provisions of Section 61 shall not be attracted, i.e., re-transfer after the life time shall not be termed as revocable transfer of assets at the first place.
For Instance: If an individual makes revocable transfer of assets in present to a senior person and make arrangements to receive such asset by way of will or inheritance in the future, in such case ,
– income from the transferred asset shall be taxed in the hands of transferee
– and, asset received by way of will or inheritance shall be exempt u/s 56(2)(vii) to attract tax provisions under Income from Other Sources.
Transfer to Spouse, Sec 64(1)(iv) v/s Revocable transfer of asset, Sec 61
Case Study : Where an asset has been transferred to spouse as an irrevocable transfer i.e. not revocable during the lifetime, whether income from such transferred asset shall be clubbed in the hands of transferor or not ?
Although Sec 61 states that income from irrevocable transfer of asset shall not be clubbed in the hands of transferor , in case above Sec 64(1)(iv) shall prevail over Sec 61 . Even if irrevocable transfer of asset has been made to the spouse , the consideration taken shall be the criteria as per Sec 64(1)(iv) ( It has been assumed that , there is no adequate consideration). Therefore, income from such irrevocable transfer to the spouse shall be clubbed in the hands of transferor in above case.
1. If the transferee sells the transferred assets, then Capital Gains (as the case may be) shall also be clubbed with the income of the transferor.
2. In case transferee has converted the transferred assets to some other form , clubbing shall be done in the same manner , where conversion in any other form can be in various forms including:
– selling & repurchase of any asset
– exchange of the assets.
Also, if there arise differences in the value of replaced or converted asset , provisions of Capital Gains shall be attracted accordingly (as the case may be).
3. In any case , if losses has been occured due to conversion or sale of the transferred asset, such loss shall also be clubbed (Also , direct losses from the asset are also to be clubbed ). This provision gives a fair deal on the part of transferor. Law is acting in fair and justifiable manner in case of both profits and losses.
4. There is no provision contained in the law regarding clubbing of income out of invested income of the asset.
In simple words, Income arising out of income earned on transferred assets shall not be clubbed.
If any individual is planning to further invest its earned income on any asset, he should transfer such asset without adequate consideration to a person with lower or Nil tax bracket.
In such case, although direct income earned from the transferred asset shall be clubbed with the transfereor , but the further income earned could be saved from higher tax rates since such income shall be taxed in the hands of transferee with lower or Nil tax bracket.
Relationship analysis under Section 64(1)(iv):
Under Section 64(1)(iv), Income from asset transferred by one spouse to another without adequate consideration shall be clubbed in the hands of transferor.
For Instance: If transferor transfers asset just few days before the marriage, income from such asset shall not be clubbed. Since the relationship as on the date of transfer is important.
Provided , such transfer shall be upto Rs.50,000 keeping in view the provisions of Section 56(2)(vii) with respect to gifts. Because a gift before marriage is not a gift to wife.
For Instance: If an individual wants to transfer his property to son’s wife in future. He should transfer such property to son’s wife as a gift on the occasion of the marriage of his son.
On the occasion of marriage, gifts can be received anytime near the date of marriage , there is no mandatory requirement of receiving gifts on or after the marriage.
In such case, forthcoming possible clubbing provisions under Section 64(1)(vi) shall not apply since there was no relationship with son’s wife as on the date of transfer and also transfer shall be treated as a gift not to be taxed ,because of gifts has been received on the occasion of the marriage.
Analysis of technical qualification of spouse under Section 64(1)(ii):
Under Section 64(1)(ii) , if spouse of an individual is receiving salary from a concern in which such individual has substantial interest, such salary income shall not be clubbed in the hands of transferor if spouse possesses technical or professional qualification.
Note: In a case, if wife of an individual is a housewife and possess even a basic qualification, such basic qualification can also be termed as technical or professional qualification and salary received by spouse from a concern in which individual has substantial interest , shall not be clubbed in the hands of transferor.
Even basic qualification of a housewife can be used to avoid tax provisions.
Note: In all above cases , Assessing Officer may require assessee or transferor to prove the source of such assets and gifts.
(Author is a Licentiate Company Secretary and CA Final student of ICAI and she can be reached For any queries or suggestions, at firstname.lastname@example.org)